Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 93917-SC

PROJECT PAPER

FOR

SMALL RETF GRANT

IN THE AMOUNT OF US$290,000

EXTRACTIVE INDUSTRY TRNSPARENCY INITIATIVE MDTF

TO THE

REPUBLIC OF SEYCHELLES

FOR AN

IMPLEMENTATION OF THE

EXTRACTIVE INDUSTRIES TRANSPARENCY INITIATIVE PROJECT

JANUARY 15, 2015

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without World

Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 31, 2014)

Currency Unit:

Seychellois Rupee (SCR)

USD 1.00 = 0.076 SCR

USD 13.18 = 1 SCR

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS 2D/3D Two Dimensional/ Three Dimensional

CPS Country Partnership Strategy

EGPS Extractives Global Practice Support

EEZ Exclusive Economic Zone

EI TAF Extractive Industries Technical Advisory Facility

EITI Extractive Industries Transparency Initiative

FM Financial Management

GDP Gross Domestic Product

GoS Government of Seychelles

IBRD International Bank for Reconstruction and Development

IDA International Development Association

IMF International Monetary Fund

JOGMEC Japan Oil, Gas and Metals National Corporation

Km Kilometer

MOFTI The Ministry of Finance, Trade and Investment

MSG Multi-Stakeholder Group

Mtons Metric tons

OPSF Office of the Principal Secretary for Finance

OP/BP Operational Policy/ Bank Policy

MPA Model Petroleum Agreement

MSG Mutli-stakeholder group

PAPT Petroleum Additional Profits Tax

PDO Project development Objective

PIT Petroleum Income Tax

SCR Seychellois Rupee

SEYPEC Seychelles petroleum Company

SIDS Small Island Developing States

SNOC Seychelles National Oil Company

SoEs State-owned enterprises

sq Square mile

US$ United State Dollar

Regional Vice President: Makhtar Diop

Country Director: Mark R. Lundell

Global Practice Senior Director: Anita Marangoly George

Practice Manager: Paulo de Sa

Task Team Leader: Ilhem Salamon

REPUBLIC OF SEYCHELLES

Implementation of the Extractive Industries Transparency Initiative Project

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT .................................................................................................7

A. Country Context ............................................................................................................ 7

B. Sectoral and Institutional Context ................................................................................. 7

C. Higher Level Objectives to which the Project Contributes ........................................ 10

II. PROJECT DEVELOPMENT OBJECTIVES ..............................................................11

A. PDO............................................................................................................................. 11

Project Beneficiaries ......................................................................................................... 11

PDO Level Results Indicators ........................................................................................... 11

III. PROJECT DESCRIPTION ............................................................................................11

A. Project Background ..................................................................................................... 11

B. Project Components .................................................................................................... 13

C. Project Cost and Financing ......................................................................................... 14

IV. IMPLEMENTATION .....................................................................................................15

A. Institutional and Implementation Arrangements ........................................................ 15

B. Results Monitoring and Evaluation ............................................................................ 17

V. KEY RISKS AND MITIGATION MEASURES ..........................................................17

A. Risk Ratings Summary Table ..................................................................................... 17

B. Overall Risk Rating Explanation ................................................................................ 18

VI. APPRAISAL SUMMARY ..............................................................................................18

A. Economic and Financial Analyses .............................................................................. 18

B. Technical Issues .......................................................................................................... 18

C. Financial Management ................................................................................................ 19

D. Procurement ................................................................................................................ 19

E. Environment and Social (including Safeguards) ........................................................ 20

DATA SHEET

Republic of Seychelles

Implementation of the Extractive Industries Transparency Initiative Project

Small RETF Grant Project Paper

Africa Region

GEEDR

Basic Information

Date: January 15, 2015 Sectors: Energy and Extractive Industries

Country Director: Mark R. Lundell Themes: Transparency and Accountability

Practice Manager/Global

Practice Senior Director:

Paulo de Sa / Anita Marangoly

George

EA Category: C

Project ID: P150595

Instrument: Grant Team Leader(s): Ilhem Salamon

Recipient: Ministry of Finance, Trade and Investment of the Republic of Seychelles

Executing Agency: Ministry of Finance, Trade and Investment of the Republic of Seychelles

Contact: Mr. Patrick Payet Title: Principal Secretary of Finance

Telephone No.: 248-2723766 Email: psf@finance.gov.sc

Project Implementation Period: Start Date: February 15, 2015 End Date: December 31, 2015

Expected Effectiveness Date: February 15, 2015

Expected Closing Date: December 31, 2015

Project Financing Data(US$M)

Total Project Cost : US$290,000 Total Financing : US$290,000

Financing Gap : None

Financing Source Amount(US$M)

BORROWER/RECIPIENT (parallel co-financing) US$75,000

Others (EITI) US$290,000

Financing Gap US$0

Total US$365,000

Expected Disbursements of the MDTF / SRETF (in USD)

Fiscal Year FY15 FY16

Annual 50,000 240,000

Cumulative 50,000 290,000

1. Project Development Objective(s): The project development objective is to help Government of Seychelles establish the

principles of a sustainable petroleum revenue management and enhance transparency in the oil sector.

Components

Component Name Cost (USD Millions)

Component 1 - Options for Petroleum revenue management in Seychelles USD 100K

Component 2 - Institutionalization of EITI in Seychelles USD 40K

Component 3 – Build MSG capacity in oil sector and petroleum revenue

management USD 150K

Compliance

Policy

Does the project depart from the CAS /CPS/CPF in content or in other significant respects? Yes [ ] No [X]

Does the project require any exceptions from Bank policies? Yes [ ] No [X]

Have these been approved by Bank management? Yes [ ] No [ ]

Is approval for any policy exception sought from the Board? Yes [ ] No [X]

Does the project meet the Regional criteria for readiness for implementation? Yes [X] No [ ]

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 [ ] [X]

Natural Habitats OP/BP 4.04 [ ] [X]

Forests OP/BP 4.36 [ ] [X]

Pest Management OP 4.09 [ ] [X]

Physical Cultural Resources OP/BP 4.11 [ ] [X]

Indigenous Peoples OP/BP 4.10 [ ] [X]

Involuntary Resettlement OP/BP 4.12 [ ] [X]

Safety of Dams OP/BP 4.37 [ ] [X]

Projects on International Waters OP/BP 7.50 [ ] [X]

Projects in Disputed Areas OP/BP 7.60 [ ] [X]

Legal Covenants

Name Recurrent Due Date Frequency

Description of Covenant

Team Composition

Bank Staff

Name Title Specialization Unit UPI

Ilhem Salamon Senior Energy Economist Oil and Gas GEEDR 234880

Lova Niaina Ravaoarimino Senior Procurement Specialist Procurement GGODR 293987

Patrick Kabuya Sr Financial Management

Specialist

Financial Management GGODR 348898

Nathalie S. Munzberg Senior Counsel Safeguards LEGEN 132625

Andrew Michael Losos Environmental Specialist Environmental Safeguards GTIDR 36169

Fowzia Hassan Energy Specialist Energy GEEDR 35889

Bourama Diaite Senior Procurement Specialist Procurement GGODR 76111

Non Bank Staff

Name Title Office Phone City

Hilda L. Yumiseva Consultant Mclean, Virginia

Locations

Country First Administrative

Division

Location Planned Actual Comments

Republic of Seychelles

7

I. STRATEGIC CONTEXT

A. Country Context

1. The Republic of Seychelles is an island-state with middle income country characteristics and

an estimated population of 90,846 (2013). The economy is small (US$1,031 million gross

domestic product in 2012) and per capita income (US$11,350 in 2012) is among the highest of

the Middle Income Countries. Seychelles comprises 115 tropical islands spread over 1.374

million square kilometers (sq. km.) in the western Indian Ocean, covering 455.3 sq. km. in land

area. Ten of the islands are inhabited, and approximately 90% of the population live on the

largest island, Mahe (60% urbanized), where the capital, Victoria, and the main port is located.

2. Seychelles has been recovering strongly from a 2008 debt crisis and is transitioning to

market-based economic policies. After high external indebtedness and loss of competitiveness

which precipitated a depletion of foreign exchange reserves and a payment default in 2008,

Seychelles energetically pursued a restructuring program focused on liberalization of the

exchange regime, significant and sustained tightening of fiscal policy, and a reduction in the

state’s role in the economy to boost private sector development. Seychelles has managed to

secure generous debt relief, which together with fiscal consolidation has led to a path for fiscal

and external sustainability.

3. These achievements aside, a number of challenges remain to be addressed. Having

accomplished high–income standards, Seychelles confronts the challenges of a small and remote

island state, highly dependent on tourism, overwhelming dependence on oil imports for energy

production, and vulnerable to a range of global shocks and climate change. Limited land, capital,

and human resources restrict its vulnerability to benefit from economies of scale in production.

The investment climate needs to be strengthened to harness private sector growth. Bottlenecks in

infrastructures remain critical constraints. Even though the Government of Seychelles has

achieved remarkable results on the fiscal front, further progress are needed to achieve debt

reduction targets.

B. Sectoral and Institutional Context

4. Oil Sector Strategy. Seychelles’ oil sector strategy is to improve energy security and

promote petroleum exploration in the Exclusive Economic Zone (EZZ) by putting in place fiscal

and regulatory incentives that will attract oil companies, expedite exploration and allow an early

commercial discovery. Seychelles depends overwhelmingly on rising petroleum imports for

energy generation, while fiscal revenues are tights and the country is aiming to lower its debt

ratios. The Government is therefore keen on expediting petroleum exploration in its EEZ. A

discovery of oil will not only improve security of supply, but will also generate additional

revenues to the Government. The legal and fiscal frameworks were revised with this objective.

The resulting oil sector activity is expected to stimulate ancillary economic growth in the

services and other sectors, generating employment and stimulating economic growth.

5. Hydrocarbons exploration. The results of hydrocarbon exploration in Seychelles are

encouraging and a potential discovery may not be too far in the future. Hydrocarbon exploration

in the Seychelles started in the early seventies following the discovery of the continental nature

8

of the underlying crust and thick sedimentary basins during the International Indian Ocean

Expedition. Since then, several geophysical surveys have been conducted and four exploration

wells have been drilled. Although no commercial hydrocarbon discovery has been made to date,

all the pre-requisites for generation, migration and trapping have been identified, including traces

of migrant oil and gas in three of the four wells drilled indicative of a working system.

6. Following a recent wave of discoveries in the East African region, interest in the Seychelles

has been rekindled and several new geophysical surveys have been undertaken, both as

proprietary surveys under petroleum agreement work programs and also as non-exclusive multi-

client surveys. Two companies have petroleum agreements with the Government of Seychelles:

the Australian based, WHL Energy Ltd and the London-based Afren Plc. WHL farmed out 75%

of its interest to Ophir Energy Plc. Afren completed a 3D seismic survey of 2500 sq.km in early

2013 and Ophir completed the acquisition of 1528 sq.km of 3D seismic in the Junon prospect in

July 2014. Data processing and interpretation is underway and drilling is planned for the first

quarter of 2015. A third company, Japanese Oil Gas and Minerals Exploration Company,

(JOGMEC) has an exploration license with the Government and they completed a 2D seismic

survey and a geochemical survey in May 2014.

7. The results of the recent seismic work have firmed up the definition of several large

prospects. Companies are now evaluating the data and expected to commence drilling in 2015.

Government of Seychelles is also contemplating the possibility of undertaking a regional

synthesis using all available data to allow PetroSeychelles to gain a better understanding of the

overall prospectivity of the Seychelles EEZ thereby ensuring that petroleum licensing policy

decisions are based on solid scientific insights.

8. Enabling Environment. The Government of Seychelles has revised its upstream oil and gas

legal and regulatory framework to foster private investment in the sector, which could not only

restore fiscal balance but potentially also fuel substantial economic growth and employment. The

World Bank supported the government effort through a technical assistance financed by the

Extractive Industries Technical Advisory Facility (EI TAF). This assistance helped the

government of Seychelles: (i) review and amend the 1976 Petroleum Act, revised in 2008, and

Model Petroleum Agreements, which provided the legal basis under which petroleum

exploration, development and production were to be conducted; (ii) assess and enhance the tax

and fiscal regime; (iii) undertake a successful promotional campaign.

9. The petroleum legal system has been enhanced. The Petroleum Taxation Act of 2008 has

been updated and amended in May 2013 (c.f. box 1) for the purpose of the Licensing Initiatives

under the amended Model Petroleum Agreement. The “open file licensing initiative” which is

now in place is significantly more transparent and competitive than the “open door policy” that

the country had until then. Further work is being developed to harmonize the Accounting

Procedure included in the Model Petroleum Agreement and the new Petroleum Taxation Act. A

new Petroleum Environment and Safety Act has also been developed with the objective to

replace the obsolete 1984 Drilling Regulations.

9

Box 1: Main features of Seychelles’ Petroleum Taxation Act

The Petroleum Taxation Act as amended in May 2013 repeals the Petroleum Income Tax Decree and makes

provision for the Petroleum Additional Profits Tax (PAPT). The main features of the new regime are as follows:

(i). Petroleum Income Tax (PIT). The rate of the PIT is 35% payable on taxable income. The Act defines

taxable income as the difference between the assessable income (market value of the petroleum sold)

accruing to the person in the tax year and the sum of the allowable deductions.

(ii). Allowed deductions are expenditures incurred for repairs of plant, machinery, implements necessary to

carry out petroleum operations; rent for land or buildings; interest on loans; royalties and bonuses.

Regarding the apportionment of expenses in terms of operating agreement, the operator is to provide a

consolidated financial statement (containing details of all expenditures on behalf of the parties) in respect

of the petroleum agreement to the controller and to each of the parties to the operating agreement at the end

of each tax year. Each party to the agreement is to also furnish a reconciliation statement reconciling the

individual tax return and the consolidated financial statement of the operator. The Amendment also adds

the depreciation rules for capital expenditures.

(iii). Petroleum Additional Profits Tax (PAPT): The tax is charged in accordance with the provisions of the

petroleum agreement, and at rates specified in that agreement. This is a tax payable on petroleum profits

exceeding pre-determined annual profitability thresholds. The PAPT return is to be submitted by the

Operator on behalf of all other companies having an interest in the relevant petroleum field. Where the

petroleum agreement relates to more than one field, a separate tax return is to be submitted in respect of

each field.

(iv). Withholding tax. At a rate of 7% on the gross amount of fees payable in respect of services performed in

Seychelles or overseas by a non-resident contractor or subcontractor in connection with petroleum

operations related to a petroleum agreement. The tax is payable to the Controller by an operator, who must

retain the tax from the services provided. Where the withholding tax has been paid, the non-resident

contractor or sub-contractor shall not be liable for any other withholding tax or business tax in Seychelles.

10. As a result of the modernization of the legal and fiscal regime, Government of Seychelles

has, over the last several months, witnessed renewed petroleum exploration interests and

activities in the Exclusive Economic Zone. In 2014, the implementation of the “Open Filing”

procedure for accepting applications for petroleum concessions has been successful and new

applications are under review. In addition, the Government intends to strengthen transparency in

financial reporting in the petroleum sector by adopting the principles of the Extractive Industries

Transparency Initiative (EITI). Further modifications of the legal and regulatory framework

might be needed to allow full disclosure of financial flows in the petroleum sector. It is however

anticipated that these changes – if any – would be limited in their scope and nature.

11. Sector (re)organization and (re)structuring. In 1984 the Seychelles Government

established the Seychelles National Oil Company (SNOC) to implement the country’s petroleum

policies, as well as represent the Government in petroleum related activities. SNOC assumed

responsibility for all upstream petroleum matters in 1986. This included responsibility for the

leasing of exploration blocks in the country’s offshore acreage to international oil companies. In

2005 SNOC merged with another company called the Seychelles Petroleum Company

(SEYPEC) and the merger performed all regulatory activities.

12. In March 2012, SEYPEC was broken in two and PetroSeychelles was created to strengthen

the Government´s capabilities to deal with the upstream sector of the oil industry, including the

supervision, monitoring, and investment in upstream activities. Responsibility for government

investment in downstream activities will remain with SEYPEC, the former regulator. If oil is

10

found in economically viable quantities and the government decides to enter into extraction, it

will then create a full-time, independent regulatory authority to monitor and regulate upstream

operations. PetroSeychelles will then be responsible for government investments in the oil sector

13. PetroSeychelles is currently a streamlined company with a core group of qualified

professional and support staff to enable the company to undertake its mandated tasks with

minimal overhead. The company has plans to grow as hydrocarbon exploration matures and

discoveries are made. The company is attached to the Office of the President of the Republic and

is governed by a Board of Directors. The company is required to submit an annual report on its

operations and audited accounts to the newly created Public Enterprise Monitoring Commission

and the Ministry of Finance.

C. Higher Level Objectives to which the Project Contributes

14. The proposed project is planned under the Bank’s Country Partnership Strategy (CPS) with

Seychelles for FY12-16. In line with Government’s commitment to further reduce the burden of

the public sector on the economy indeed, the CPS targets improvements in the allocation and

execution of public expenditures. The foundation for its two pillars (which aim to promote

competitiveness and employment and to reduce vulnerability and resilience) involves

strengthening Governance and Public Sector Capacity.

15. Since initial oil exploration has yielded encouraging results, the authorities want to put in

place an appropriate governance structure for the petroleum sector. In this context the CPS

planned technical assistance to create the institutional framework to support oil production and

make sure that appropriate benefits accrue to the country. As reported in the CPS progress report

dated of November 2014, PetroSeychelles has been created to this end as the regulatory authority

and the Seychelles Petroleum Taxation Act was enacted in August 2013, thereby establishing an

improved legal and fiscal framework for awarding and administering petroleum agreements,

including safety, environmental, and operational standards and fiscal terms. The Government

also issued the Model Petroleum Agreement (MPA) in June 2013, which includes health, safety

and environmental regulations. In addition CPS support has focused on helping Seychelles to

fully participate in the Extractive Industries Transparency Initiative (EITI). With support from

the Extractive Industries Technical Assistance Fund (EITAF) the Government completed the

requirements to join EITI and was admitted as an EITI candidate country in August 2014. Since

the proposed project is meant at helping Government of Seychelles implement the EITI work

plan, it does fit into the CPS.

16. Finally, the proposed project is also consistent with the twin pillars if the banks’ Africa

Region Strategy meant to increase “competitiveness and employment” as well as to improve

“vulnerability and resilience”. By supporting governance and accountability, the project will

enhance sector management, and its potential to stimulate growth and economic diversification,

and reduce its heavy dependence on fossil fuel imports.

11

II. PROJECT DEVELOPMENT OBJECTIVES

A. PDO

17. The project development objective is to help Government of Seychelles establish the

principles of a sustainable petroleum revenue management and enhance transparency in the oil

sector.

Project Beneficiaries

18. The direct project beneficiaries are the multi-stakeholder group (MSG), the Government of

Seychelles (GoS), Seychelles Petroleum and private investors.

19. MSG will benefit from enhanced capacity to understand the key issues and challenges

pertaining to the oil sector and petroleum development. With enhanced capacity, MSG will have

better chance to influence positively decisions on petroleum revenue sharing and sustainable

management of the resource.

20. GoS and PetroSeychelles will also directly benefit from the project since increased

transparency will foster private sector appetite to engage in exploration activities in Seychelles

and match citizens’ requirement for good governance. Private sector investment in oil

exploration has the potential to generate substantial fiscal revenue in the medium run.

21. The private investors contemplating investments in the country’s oil sector are direct

beneficiary of the project since they would be able to operate in a more favorable business

environment.

PDO Level Results Indicators

(a) Improved capacity to manage petroleum revenues in a sustainable way, measured by the

adoption, by Seychelles Petroleum MSG, of the study developing options on petroleum

revenue management.

(b) Improved transparency and accountability in the oil and gas sector of the Republic of

Seychelles, measured by the publication of the reconciliation report and the

institutionalization of EITI.

(c) Enhanced capacity of Seychelles Petroleum MSG to manage the EITI compliance

process, measured by its capacity to meet EITI reporting requirements.

III. PROJECT DESCRIPTION

A. Project Background

22. The government of Seychelles has applied for EITI candidacy on June 12, 2014 (c.f. box 2).

On August 6, 2014, Seychelles was admitted as EITI Candidate Country, after successfully

completing the four "sign-up" steps, including the development of a work plan, which was

validated by the EITI Board, and indicates that Seychelles will present its first EITI report by

February 6, 2016 with the objective to become EITI compliant by February 6, 2017.

12

Box 2: Extractive Industries Transparency Initiative

Overarching Principles. The principles, on which the Extractive Industries Transparency Initiative is based, state

that the wealth from a country’s natural resources should benefit all its citizens and that this will require high

standards of transparency and accountability. After the Principles were agreed, rules were drawn up to ensure that all

EITI member countries committed to a minimum level of transparency in company reporting of revenues paid and

government reporting of receipts.

Overall Benefits. By implementing the EITI, governments enhance transparency, accountability and good

governance, thereby mitigating the resource curse risk. Countries rich in natural resources such as oil, gas, and

mining have tended to under-perform economically, have a higher incidence of conflict, and suffer from poor

governance. These effects are not inevitable and it is hoped that by encouraging greater transparency, in countries

rich in these resources, some of the potential negative impacts can be mitigated.

Application. A country intending to implement the EITI is required to undertake the following four "sign-up" steps

before submitting an EITI candidature Application to the EITI Board:

1) The government is required to issue an unequivocal public statement of its intention to implement

the EITI.

2) The government is required to appoint a senior individual to lead on the implementation of the

EITI.

3) The government is required to commit to work with civil society and companies, and establish a

multi-stakeholder group to oversee the implementation of the EITI.

4) The multi-stakeholder group is required to maintain a current workplan, fully costed and aligned

with the reporting and Validation deadlines established by the EITI Board.

The Board reviews the application and if it establishes that the requirements have been successfully met, the country

becomes an EITI Candidate country.

Compliance. When the EITI Board admits an EITI Candidate, it establishes deadlines for publishing the first annual

EITI report and undertaking validation by a third-party, which is directly procured by the International Secretariat to

assess EITI compliance. The EITI report communicates the efforts undertaken to meet and/or maintain compliance

with the 7 EITI requirements, which are as follows:

1) Effective oversight by the multi-stakeholder group.

2) Timely publication of EITI Reports.

5) EITI Reports that include contextual information about the extractive industries.

6) The production of comprehensive EITI Reports that include full government disclosure of

extractive industry revenues, and disclosure of all material payments to government by oil, gas and

mining companies.

7) A credible assurance process applying international standards.

8) EITI Reports that are comprehensible, actively promoted, publicly accessible, and contribute to

public debate.

9) The multi-stakeholders’ group to take steps to act on lessons learned and review the outcomes and

impact of EITI implementation.

Source: EITI (https://eiti.org/eiti/principles)

23. The approved EITI work plan for Seychelles includes the following five objectives in

addition to the one of becoming an EITI Candidate Country.

13

1) To establish the conditions needed to institutionalize EITI by (i) establishing an

EITI secretariat; (ii) amending as needed the legal and regulatory framework of the

oil and gas sector to ensure EITI compliance; (iii) removing if needed legal barriers to

EITI disclosure of payments and receipts; and (iv) increasing accountability of

PetroSeychelles.

2) To develop a framework for prudent use of oil revenues for sustainable

development and poverty management by preparing and discussing with all interested

at stake a study articulating the options for petroleum revenue management in Small

Island Developing States (SIDS).

3) To build Seychelles MSG capacity to implement, communicate and monitor EITI

by enhancing stakeholders knowledge of EITI, Seychelles’ oil sector issues and oil

revenues ownership and management.

4) To reconcile oil payments and receipts and publish and disseminate the EITI

report by February 6, 2016.

5) To validate the implementation of the Seychelles EITI with all requirements met,

after an independent validator is appointed by the International Secretariat to review

the report and achievements, and assess EITI compliance.

24. The proposed technical assistance will help Government of Seychelles implement the

activities programed under the EITI work plan and, more specifically, to:

(a) Develop a study on petroleum revenue management, articulating the concepts of

ownership, management and revenue sharing that would apply in the event

hydrocarbons are found to be commercially viable in Seychelles;

(b) Identify potential amendments of the legislation that would be needed to

institutionalize EITI in Seychelles;

(c) Build MSG knowledge about the oil sector and the concept of petroleum revenue

management in Seychelles.

B. Project Components

25. Component 1 - Options for Petroleum revenue management in Seychelles. The study on

the revenue management framework will clarify the concepts of ownership, management and

revenue sharing, which will apply in the event the exploration is successful. The ultimate

objective is to make sure that if oil production is commercially viable, oil revenues will foster

sustainable economic development and poverty reduction by providing GoS with the budget

needed to invest in infrastructure and public services. The study will also articulate the different

roles that are needed to adequately manage petroleum resources, and highlight best practices and

the lessons learnt from international experiences. Finally the study will provide input for the

revenue management provision that could be included in the petroleum legislative framework,

with specific recommendations on potential amendments of the Constitution, the Petroleum Law

and the petroleum regulations.

14

26. A series of workshops will be organized on revenue management to help Government of

Seychelles discuss the options for sustainable revenue management and make decisions on the

way forward.

27. Component 2 - Institutionalization of EITI in Seychelles. To require and maintain the

practice of disclosing oil sector contextual information and revenues flows, the Government of

Seychelles will need to make sure that the provisions existing in the current legal and regulatory

framework allow the collection and publication of all relevant information. If not, the necessary

amendments should be drafted and incorporated as needed. This component of the project is

meant at helping GoS meet the EITI institutionalization requirement by financing the review and

amendment as of the legal and regulatory framework of the oil and gas sector to ensure EITI

compliance.

28. Component 3 – Build MSG Capacity in oil sector and petroleum revenue management. As international experience has shown, mismanagement of petroleum revenues can lead to

economic instability, impoverishment, social disparities, environmental degradation, and unrest,

in addition to weakened overall governance. To properly manage petroleum revenue and

mitigate the risk of resource curse, it is essential for Government of Seychelles to develop the

capacities of all relevant stakeholders to engage into meaningful discussions on management of

the petroleum resource. This component of the project is aimed at developing these capacities. It

will finance training of the multi-stakeholder group in oil sector reviews and petroleum revenue

management, and finance the consultancy services needed to help the MSG develop its first EITI

report and audit the proposed grant.

29. Given that EITI trust fund is expected to close on December 31, 2015, it can realistically not

support all the activities planned by the government of Seychelles, and validated by the EITI

Secretariat in the work plan for the period 2014-2016. The activities, which are neither financed

through the proposed EITI grant nor by the Government of Seychelles, will be financed by the

follow up trust fund – the Extractives Global Practice Support (ESGP) – which is being currently

developed - if fund availability is confirmed for the proposed project, when the trust fund will

become effective.

C. Project Cost and Financing

Project Components Project cost Grant Financing % Financing

1. Options for Petroleum revenue management in Seychelles

2. Institutionalization of EITI in Seychelles

3. Build MSG Capacity in oil sector and petroleum

revenue management*

Total Baseline Costs

Physical contingencies – 5% (included in each item) Price contingencies - – 5% (included in each item)

USD 100K

USD 55K

USD 210K

USD 100K

USD 40K

USD 150K

100%

73%

72%

Total Project Costs

Interest During Implementation

Front-End Fees

Total Financing Required

USD 365K USD 290K USD 79%

15

30. The core activities of the project would be financed by EITI MDTF through a USD 500,000

grant, with GoS providing a parallel co-financing of USD 75,000

31. The core activities of the project would be financed by EITI MDTF through a USD 290,000

grant, with GoS providing a parallel co-financing of USD 75,000. The project cost includes only

activities that will be realistically implemented before EITI closing date, which is scheduled for

December 31, 2015.

32. There is a gap in the financing of the set of activities planned under component 3 which is

meant to “Build MSG capacity in oil sector and petroleum revenue management”. The total

budget needed to cover the costs of activities planned under this component (which mirrors the

sect of activities covered under Objectives 4 and 5 of the work plan validated by the EITI

Secretariat, including audit costs) is USD 270K. This financial gap will be covered by ESPG

provided availability of the funds under the new trust fund is confirmed.

33. The project will be able to reach its development objectives whether or not ESPG funds are

confirmed since the follow on activities would finance separate activities, to further enhance

Seychelles Petroleum MSG capacity.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

34. The Ministry of Finance, Trade and Investment (MOFTI) will be the recipient organization

that that will administer the funds through the Office of the Principal Secretary for Finance

(OPSF), for the benefit of the Petroleum MSG, which consists of representatives of GoS, Civil

Society, private Sector and Industry (see table 1) and is responsible for the successful

implementation of EITI.

Table 1. Petroleum MSG Seychelles

Government The Principal Secretary, Department of Finance, Ministry of Finance, Trade and

Investment (Chair)

The Central Bank Governor

The Commissioner of the Seychelles Revenue Commission

The Legal Adviser, Seychelles Revenue Commission

1 Representative from the Attorney General’s Office

1 Representative from the Ministry of the Environment (appointment expected)

Civil Society 4 members from the NGO Coalition Ciizen Engagement Plateform Seychelles

(CEPS)

Private Sector The Country Manager of Ernst & Young

One representative from CORVINA

Oil companies The CEO of PetroSeychelles

The Managing Director, WHL Energy

General Manager External Relations, Afren EAX

35. OPSF, which is anchored within MOFTI, will be the implementing agency of the proposed

project. OPSF has the mandate to implement donors’ financed operations and has a record of

successful experiences in World Bank funded operations. At present, it is in charge of the

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implementation of the Sustainability and Competitiveness Development Policy Lending and the

supervision of a Study on energy efficiency and Renewable energy.

Financial Management and Disbursement Arrangement

36. The project will use the Financial Management manual, currently used by the Department of

Finance, which is part of the Public finance management regulations developed under the Public

Finance Act of 2012. Moreover, OPSF already has a defined structure, administrative

arrangements, internal control procedures, including procedures for authorization of

expenditures, maintenance of records, safeguarding of assets (including cash), segregation of

duties to avoid conflict of interest, regular reconciliation of bank account statements, bank

accounts signing mandate (to include at least two signatories), regular reporting to ensure close

monitoring of project activities, and the flow of funds to support project activities. OPSF has past

experience of managing grants.

37. Use of the existing Office and its financial management arrangements, which are acceptable

to the World Bank, will facilitate proper utilization of available resources, and ensure

consistency of fiduciary implementation across the project, as well as fiduciary risk management.

OPSF is also responsible in ensuring that project funds are used for their intended purpose.

38. The annual budget would be prepared by OPSF with input from the petroleum MSG. Project

annual budgeting would be based on the cost tables, and would be updated according to the latest

information during project implementation. The approved annual budget would be included in

the MOFTI budget estimates, entered into the accounting system, and used for periodic

comparison with actual results as part of the interim reporting.

Flow of Funds and Disbursement

39. The EITI grant funds will be channeled from the World Bank to the Government of

Seychelles through a US dollar designated bank account in the Central Bank which will be used

to pay all eligible project expenses. The designated account will be opened prior to effectiveness

of the project and will be operated in accordance with the procedures and guidelines set forth in

the Bank’s Disbursement Guidelines.

40. The account will be managed by the Financial Planning and Control Division in the Ministry

of Finance, Trade and Investment. The department of Finance will manage all the expenditures

and maintain the supporting documentation. As eligible expenditures are incurred, the Senior

project accountant shall withdraw the amount to be financed by the World Bank from the

designated account in accordance with the grant agreement.

41. The Department of Finance shall be responsible for producing the Interim Financial Reports

(IFRs) on a bi-annual basis to be submitted no later than 45 days after the end of each reporting

period to the Bank. These reports would provide required financial monitoring information.

42. The recipient shall prepare and subject to audit only one project Financial Statements

covering the entire project period. The audited Financial Statements for the period shall be

furnished to the World Bank not later than six months after the end of prescribed disbursement

deadline.

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B. Results Monitoring and Evaluation

43. Monitoring and evaluation would be managed by the Department of Finance with input from

the petroleum MSG. The World Bank team would assist the Department of Finance in tracking

performance indicators during regular supervision missions. The Department of Finance, through

OPSF, will also be responsible for overall day-to-day technical supervision of the

implementation of the project activities and will benefit from technical input from the petroleum

MSG to this end.

44. Project monitoring and evaluation will include the following:

(d) Status Reports: With input from the petroleum MSG, OPSF will prepare status reports

on the implementation of the project activities as part of the terms of the Implementation

Grant Agreement. These reports must be submitted on a bi-annual basis no later than 45

days after the end of each reporting period to the Bank. The goal of status reporting is to

ensure timely support and feedback from the Government of Seychelles on the activities

outlined in the Grant Agreement. These reports will also include all EITI publication

requirements, as well as the status of the Project Results Framework: PDO and

Intermediate Results Indicators, when applicable and as contained in Annex 1.

(e) Completion Report: With input from the petroleum MSG, OPSF will also prepare a

completion report within six months of grant closing, to ensure that the objectives

outlined in the Grant Agreement are met and there is a plan for their sustainable

continuation.

(f) Financial Statements: OPSF is required to prepare financial statements that reflect the

operations, resources, and expenditures related to the activities detailed in the Grant

Agreement. The requirements for periodic reporting and independent auditing of

financial statements will be included in the Grant Agreement.

V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Risk category Rating

1. Political and Governance L

2. Macroeconomic L

3. Sector Strategies and Policies L

4. Technical Design of Project or Program L

5. Institutional Capacity for Implementation and Sustainability M

6. Fiduciary L

7. Environment and Social L

8. Stakeholders L

9. Other: program and donors M

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OVERALL M

B. Overall Risk Rating Explanation

45. Overall risk is rated moderate due to moderate implementation capacity risk and program and

donors coordination risks.

46. While the Department of Finance has a good record in implementing bank projects, the

timeframe for this project implementation is tight. As a result, the implementation risk is

moderate rather than low as is the case for projects with a longer implementation framework. To

mitigate this risk the World Bank supervision team will help the client draft terms of reference

and timely procure the services, by providing OPSF with examples of terms of reference that

could be used for the various assignments.

47. There is also a moderate risk of duplicating some of the efforts already developed in the

thorough review of the oil and gas legal and regulatory framework that has recently been

completed by the Republic of Seychelles, with support from the IMF and other donors. To

mitigate this work, the World Bank supervision team will work with the country management

unit and liaise with colleagues from IMF and other relevant parties.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analyses

48. . The proposed project is purely a technical assistance project meant at supporting

Government of Seychelles’ efforts to comply with EITI requirements and thereby establish the

principles of a sustainable petroleum revenue management system and enhance transparency in

the oil sector. Therefore, benefits are not easily quantifiable making it difficult to accurately

carry out a traditional cost benefit analysis. Instead, a qualitative assessment indicates that the

proposed project will have substantial economic benefits to Seychelles as it will improve

transparency, accountability and governance in the extractive industries. By enhancing the

petroleum MSG capacity to comprehend the oil sector and the concept of petroleum revenue

management in Seychelles, the project is also expected to help reach sustainable agreements in

the industry and to make the petroleum sector development a better contributor to shared growth

and employment.

49. The proposed project also has financial benefits that are sustainable. In the first place, by

introducing EITI practices, it will enhance the prospects for attracting renowned investors to

invest in upstream oil and gas; and directly leverage funds towards this end. By supporting

Government of Seychelles’ effort to reach early agreement on petroleum revenue ownership,

management and sharing, the project will also contribute towards reducing the risk that

petroleum becomes a curse rather than a blessing as is the case in many countries with large

petroleum endowed.

B. Technical Issues

50. The activities covered in the proposed project are all part of the EITI work plan, which was

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cleared by EITI board in August 2014. They are therefore all consistent with the set of activities

traditionally financed by EITI and essential for Seychelles’ to become an EITI compliant

country.

C. Financial Management

51. The fiduciary arrangements will be carried out by OPSF. The Bank performed a simplified

financial management assessment of this proposed project in accordance with OP/BP 10.00 and

the Financial Management Practice Manual (issued by the Financial Management Sector Board

in March 1, 2010). It was concluded that the recipient agency has an adequate financial

management system in place that can provide, with reasonable assurance, accurate and timely

information on the status of the funds as required by the Bank.

52. Overall, the project is relatively small and has a straightforward design and planned

activities. However, to ensure that the required FM arrangements are maintained, most contracts

will be prior reviewed by the World Bank. However, the project would allow for direct

purchases. The grant will be transferred to a dedicated account.

53. The overall FM risk-rating assigned to this project at appraisal stage is low. The financial

management team will monitor the project’s financial risk during project implementation.

D. Procurement

54. Procurement of goods and works and selection of consultants shall be conducted in

accordance with: (i) "Guidelines: Procurement of Goods, Works, and non-Consulting Services

Under IBRD Loans and IDA Credits & Grants by WB Borrowers," dated January 2011 revised

July 2014; (ii) "Guidelines: Selection and Employment of Consultants Under IBRD Loans and

IDA Credits & Grants by WB Borrowers," dated January 2011 revised July 2014; and (iii)

“Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD

Loans and IDA Credits and Grants,” dated October 15, 2006, and revised in January 2011.

55. In case there are jointly co-financed activities due to possible contribution of other donors

during the project implementation, the procurement process will follow Bank rules and

procedures as indicated above and the review of the procurement activities and decisions will

remain in the Bank hands. There will be no exceptions to this rule.

56. The project’s procurement activities are quite simple since they mainly consist of selection of

consultants. These activities will be carried out by OPSF, which procurement performances have

been consistently satisfactorily.

57. The procurement methods and requirement for bank review are described hereinafter.

(a) Contracts for goods

Procurement Method Threshold for the method

in 1000 USD

Bank review in 1000 USD

(a) International

Competitive Bidding (ICB)

USD 0.5 or more for goods All contracts

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(b) National Competitive

Bidding

All contracts estimated below

the ICB threshold and above

shopping ceiling

The first two contracts

(c) Shopping

Below USD 100 for goods

Post review

(d) Direct contracting N/A All contracts

(b) Contracts for consultant services

Procurement Method

Contract estimated

amount in 1000 USD

Bank review in 1000 USD

(a) All selection

methods except

SQC and single

source selection

NA

All contracts estimated above USD

200

(b)Selection Based on the

Consultants’

Qualifications (SQC)

100 All contracts estimated above USD

200

(c) Individual Consultants

N/A All contracts estimated above USD

100

(d) Single Source

Selection

N/A All contracts

58. The project’s procurement plan was reviewed and approved by the Bank.

59. The Bank standard bid documents for goods and the bank standard RFP (Requests for

Proposals) will be used for all contracts. For the purpose of clause 2.7 of the consultant

guidelines, for all contracts estimated below the equivalent value of USD 50,000, the short list

may comprise only local firms.

E. Environment and Social (including Safeguards)

60. This grant concerns building client capacity on revenue management. It is not expected to

have potential adverse environmental and social implications or risks, and therefore no safeguard

policies are triggered. This grant involves reporting about the context of the Seychelles oil sector

and pure accounting and disclosure of payments and revenue data, which has no safeguards

issues. Therefore the proposed project classification is C.

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Annex 1: Results Framework and Monitoring

Seychelles: Implementation of the Extractive Industries Transparency Project

Project Development Objective (PDO): The project development objective is to help Government of Seychelles establish the principles of a sustainable petroleum revenue management and enhance

transparency in the oil sector.

PDO Level Results Indicators* C

ore

Unit of

Measure Baseline

Cumulative Target Values** Frequency

Data Source/

Methodology

Responsibilit

y for Data

Collection

Description (indicator definition etc.)

YR 1 YR 2

Indicator One: Adoption, by

Seychelles Petroleum MSG, of

the study developing options on

petroleum revenue management

Text Options

for

petroleum

revenue

managem

ent not

available

The study to

develop

options

conducted.

The study is

conducted and

the options

adopted.

Once Report OPSF Indicates that (i) the study has been developed

by the consultants, (ii) members of Seychelles

Petroleum MSG have been trained to petroleum

resource management, have discussed the work,

provided input as needed and adopted

acceptable options, thereby reflecting enhanced

capacity to develop a sustainable revenue

management agreement.

Indicator Two:

Institutionalization of the EITI

Yes/ No No No Yes Once Report OPSF Indicates that: (i) the review of the oil and gas

legal and regulatory framework has been done,

(ii) obstacles preventing the publication of

financial flows in the oil and gas sector have

been identified and (iii) amendments enabling

to remove these obstacles have been drafted,

thereby enabling the institutionalization of the

EITI and an increased level of transparency and

accountability in the sector.

Indicator Three:

Compliance to EITI reporting

requirements by Seychelles

Petroleum MSG

Yes/ No No Yes Annual Report OPSF Indicates that the key stakeholders of

Seychelles Petroleum MSG have been trained

on petroleum resource management and that

they are capable to lead the production of the

specific reporting requirements of EITI, thereby

demonstrating they capacity to successfully

drive the EITI process.

INTERMEDIATE RESULTS

Intermediate Result (Component One):

Intermediate Result indicator

One: Number of workshop on

Petroleum Revenue Management

Number 0 1 2 Annual Report OPSF To ensure that all stakeholders are consulted on

petroleum revenue management and that the

study is inclusive and has the potential to reflect

stakeholders views and meet their expectations

:

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Intermediate Result (Component Two):

Intermediate Result indicator

One: Review of the oil and gas

legislation needed for the

institutionalization of EITI is

performed.

Yes/ No No Yes Yes Once Report OPSF Indicates that a new review of the oil and gas

sector legislation has been developed in view

of identifying the additional amendments that

would be needed to ensure EITI reporting

requirements. Since the latest review and

amendment of the oil and gas sector legislation

have been done, in 2013, with the objective of

fostering competition and private sector

competition, they might not suffice to ensure

compliance with EITI requirements.

Intermediate Result (Component Three):

Intermediate Result indicator

One: % of Seychelles Petroleum

MSG members trained

% 0 85 100 Annual Report OPSF Indicates that the members of Seychelles

Petroleum MSG have received the training

financed under the project

Intermediate Result indicator

Two: Adoption of the

reconciliation report by

Seychelles Petroleum MSG

Yes/ No No No Yes Annual Report OPSF Indicates that Seychelles Petroleum MSG has

been able to lead the successful preparation of

the first EITI reconciliation report.

*Please indicate whether the indicator is a Core Sector Indicator (see further http://coreindicators)

**Target values should be entered for the years data will be available, not necessarily annually

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